Bait contracts

Marie-Louise Vierø

Oxford Economic Papers, 2014, vol. 66, issue 3, 702-720

Abstract: This article explores contracting in the presence of ambiguity. It revisits Holmström’s sufficient statistic result of when to condition a contract on an outside signal. It is shown that if the signal is ambiguous, in the sense that its probability distribution is unknown, then Holmström’s result can be overturned. Specifically, uninformative ambiguous signals can be valuable.

Date: 2014
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Working Paper: Bait Contracts (2009)
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